Analysis: Is there a "Made in Germany" premium for solar?

FRANKFURT Sprucing up your company profile by hiring a popular soccer player and a former international TV celebrity to star in advertisements may be run of the mill marketing for some.

For a solar company, it may give the edge needed to survive in a fiercely competitive and fast-changing environment.

Germany's SolarWorld, a maker of solar modules, throws a lot of resources at building its brand when selling its products outside of its domestic market, where TV ads have helped it to become a major market player.

After running ads with Lukas Podolski -- a member of Germany's national soccer team -- earlier this year, the company started a campaign in the United States with an unlikely figure: Larry Hagman -- whose fictional character in TV show "Dallas" was the epitome of a greedy, scheming oil tycoon -- is singing the praises of green energy for SolarWorld.

Such efforts lie at the heart of a bigger battle as SolarWorld, along with German peers such as Q-Cells, takes on fierce international competition.

"This is one way of fighting back the brutal Asian competition," said Philipp Bumm, analyst at Cheuvreux in Frankfurt.

The $39-billion solar industry is no exception to a broad trend of cheaper Asian rivals eating away market share of European and U.S. companies that usually operate with higher labor costs.

Asian module makers own about half of the German market for solar modules, by far the world's biggest, as they offer products at a discount of about 10-20 percent compared with their European peers, which bank on their high-quality products.

EXPORT MORE

Large subsidies, so called feed-in tariffs, have made Europe's biggest economy the world's largest solar market, creating 83,000 jobs in the eastern part of the country that has otherwise suffered an exodus of young, educated Germans.

But the German government, under Chancellor Angela Merkel, has slashed support to the sector, a factor that is forcing the industry to become more competitive.

With the German market expected to dwindle next year -- solar industry association EPIA estimates that it could drop to 3 gigawatts (GW) from an expected 8 GW this year -- companies have to seek growth elsewhere to maintain employment.

In future, German solar module makers will not only be forced to export more but also rely on their image when they expand their international presence. This works for some industries. The question is whether it will work for the solar sector.

"It's a fair question to ask 'why would something that works with cars not work with solar'," said Ben Lynch, analyst at Bryan, Garnier & Co in London, pointing to the booming car industry that features prominent brand names such as Porsche, BMW and Mercedes.

Germany's carmakers, enjoying an excellent reputation, successfully charge high prices for high quality around the world and are growing rapidly in emerging markets such as China and India.

"Exporting the price premium (for solar modules) will be tougher. Asian competitors are also working on building a brand," said Holger Frey, fund manager at DWS, the asset management arm of Deutsche Bank. He pointed to Chinese module maker Yingli, which ran ads during the soccer World Cup this year.

CALIFORNIA DREAMING?

Frey added, however, that charging a premium may still work in some growing markets such as France, the Czech Republic and the United States -- which EPIA says could overtake Germany as the world's largest solar market in 2014.

"I'm sure that SolarWorld will be able to export its premium to the U.S. and partly does so already," Cheuvreux's Bumm said.

SolarWorld, for example, has set up production sites in California, the country's largest solar market, and Oregon and German peer Solon produces modules in Arizona.

Success of the premium strategy also hinges on whether these markets will provide enough growth to offset the feared decline in Germany, something that is hard to predict as regulatory changes in these countries could dampen growth next year and beyond.

HSBC, for example, estimates the U.S. market could account for 11.4 percent next year, up from an expected 7 percent this year. However, the brokerage's analysts expect the Czech market to collapse to 200 megawatts (MW) in 2011, from 1.2 GW this year, a share of less than 2 percent.

"I think it'll be difficult to do solely based on nationality. Made in Germany alone does not command a premium," said Philippe de Weck, fund manager at Pictet & Cie in Geneva.

"In the end, it's about quality and if I look at the top 10 makers, I don't see any problems in terms of quality."

In its 2009 quality ranking, which is based on module efficiency, industry publication Photon put SolarWorld products first, followed by U.S. world leader First Solar. U.S.-listed Solarfun, the first Chinese player on the list, ranks 13th.

In Photon's test for the month of July 2010 -- just a snapshot and not an indicator for the whole year -- Solarfun kept its ranking, while SolarWorld came in 14th.

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